In the winner-takes-all world of finance, where fortunes can be made – and lost just as quickly, the mysterious case of vanishing funds had sent the community into disarray. This investigative piece delves deeper into this case, focusing on a comprehensive case study on Samuel Bankman-Fried, a once prominent – and now infamous – figurehead in the cryptocurrency landscape. Samuel Bankman-Fried’s financial dealings have raised eyebrows and changed the very perception of integrity in the modern financial system. On Thursday, 2 November 2023, he was found guilty of stealing from client deposits and defrauding investors of his now-bankrupt cryptocurrency exchange firm. US prosecutors have called it one of the biggest financial fraud cases in history as he looted $8 billion out of sheer greed. In an age of digital currencies and complex investing strategies, disappearing funds are a rising cause for concern. The subtle misdirection frequently leaves investors, stakeholders, and regulatory bodies dealing with the fallout of financial malpractice.
THE MAN BEHIND THE MESS
In Michael Lewis’s book, Going Infinite, Bankman-Fried is presented compassionately as a clever, human, but emotionally distant figure. Though he appears to lack empathy for others, he rationalises his actions according to the ethical worldview of successful altruists. He avoids eating meat to reduce animal suffering and commits to minimising human suffering by supporting initiatives to combat existential risks such as unchecked artificial intelligence. After earning a physics degree from MIT, Samuel joined the trading firm Jane Street, where he learned how to arbitrage minor price variations between assets. He proved to be skilled at swiftly spotting, calculating and executing gambles. But as Lewis points out, Samuel eventually realised that Jane Street leached rents from the financial system rather than doing anything to benefit humanity. Even ignoring that, the millions of dollars Samuel could ultimately earn there would make little difference in alleviating world misery. He left Jane Street to pursue better endeavours. He noticed that the price discrepancies were much higher in cryptocurrency markets, where poorly designed exchanges and the lack of regulation kept professionals away. So he founded the hedge fund Alameda Research, where he made millions by replicating the Jane Street model in more fertile hunting grounds.
THE HOUSE OF CARDS
Recognising the overhaul that the crypto market needed to attract professional traders, Bankman-Fried enlisted the help of his friend Gary Wang to write the code for FTX. An exchange can be extremely profitable as it can take a cut out of every trade made on the platform without taking much risk. Clients usually forfeit their collateral when asset prices move in the wrong direction. FTX revolutionised this process by closing out trades extremely quickly to reduce the possibility that a trader’s collateral was insufficient to cover their losses, which would require FTX itself to spread that loss to other traders. Samuel used conventional logic to overcome his prior solitary tendencies and devoted much time and money to spreading the message. He spent hours marketing FTX on television and sent cash to celebrities like NFL quarterback Tom Brady, influencers, and financial gurus. He also made considerable donations to political candidates – Democrats and Republicans alike – hoping the US government would agree to license FTX. He also recognised that his exchange would not work unless it were doing business from the gleaming office towers of New York City. Alameda was enlisted as a market-maker to support FTX, stepping in to buy or sell on the other side of the exchange when not enough traders materialised. But of course, Alameda required cash to cover the losing sides of the deals and hold onto assets until they could be sold. Samuel authorised it to borrow unlimited money from FTX, thus using customer funds to backstop the same customers’ transactions. The risk-minimisation technique was an illusion. This may explain how FTX obtained a competitive advantage over the existing exchanges. FTX consumers received good terms without realising they were exposed to massive risk. When they eventually discovered the truth, they withdrew their funds, and the house of cards crumbled. The US government alleged that Bankman-Fried, the majority owner of both firms, intentionally gambled with customer funds. He claimed that he was unaware that Alameda owed $8 billion to FTX and contended that he did not make any fraudulent statements when he or FTX offered assurances that their clients were protected. Even if Samuel did not aim to deceive anyone, the law defines fraud as reckless disregard for the truth. He must have realised he was taking extravagant risks by refusing to enlist skilled financial and legal specialists to monitor his firm. While forgivable in a teenager, Samuel’s hostility to “grownups” is likely to be criminal in a manager of a $32 billion firm that had become a vital part of the rising financial industry.
THE FALL
Several dubious transactions surfaced as the investigation descended into the financial maze surrounding Samuel Bankman-Fried. The core issue was the abrupt loss of considerable money from FTX’s reserves, which baffled investors and industry analysts. His stated strategy was based on the complexity of the Bitcoin market. He took advantage of the decentralised and generally uncontrolled digital currency structure to carry out transactions that seemed lawful but disguised a more profound truth. Due to complicated transactions and the creative use of blockchain technology, he could syphon monies from FTX without triggering any early alarms. Cryptocurrencies, notorious for their pseudonymous nature, gave him a veil of anonymity, complicating tracing down the missing funds. As suspicions grew, financial forensic experts were brought in to investigate FTX’s financial records. Their painstaking analysis found a sequence of transactions that bypassed conventional oversight, resulting in a monetary illusion that concealed the disappearance of significant funds. Working with blockchain specialists, detectives tracked the movement of assets through a maze of digital wallets and exchanges, eventually assembling the puzzle of the missing funds. The findings revealed a troubling picture of financial opacity in the cryptocurrency business, emphasising the need for increased regulatory scrutiny. The aftermath of Bankman-Fried’s cryptocurrency crackdown had far-reaching implications. FTX, formerly seen as the pioneer in the crypto exchange market, faced severe reputational damage, and regulatory agencies increased their scrutiny of digital asset platforms. Angered by the loss of funds, investors demanded greater openness and responsibility within the Bitcoin industry.
THE VERDICT
Samuel became the symbol of cryptocurrency’s vices when he was convicted of seven charges of fraud and conspiracy after a monthlong trial that exposed his unhinged arrogance. A jury of nine women and three men deliberated for just over four hours before finding him guilty of wire fraud, conspiracy and money laundering. The combined crimes carry a maximum penalty of 110 years, and he is expected to appeal. He is set to be sentenced on March 28 of this year. The swift verdict reflected prosecutors’ overwhelming evidence against Bankman-Fried, which included millions of pages of internal correspondence, spreadsheets and memos. Following FTX’s collapse, three of Samuel’s senior deputies pled guilty to fraud and agreed to cooperate with authorities in exchange for leniency. During the trial, they had stated that Samuel regularly told them to lie to the public and transfer billions of dollars in client funds from FTX to Alameda Research. Bankman-Fried attempted to dismiss FTX’s failure as the unfortunate outcome of a massive accounting error rather than willful fraud. However, throughout his trial, prosecutors said he had frequently deceived clients, lenders, and investors, using their money to build himself up into a crypto titan.
Author: Amar Chowdhury
